Mumbai: Rs15,000 crore. That's roughly the amount of commission you paid insurance agents for buying policies in 2007-08.
Think they'll let go of the golden geese for anything?
That in a nutshell is the war between the Committee on Investor Awareness and Protection, which wants the hefty commissions out, and the insurance agents, who are in an all-out bid to keep it coming.
The Insurance Regulatory and Development Authority (Irda), the sector regulator, has so far been keen to maintain status quo.
D Swarup, chairman of the Pension Fund Regulatory and Development Authority (PFRDA), revealed the hefty figure (Rs 14,704 crore) at an awards function recently, making the case for "a felt need to introduce some more order and structure."
The statement reiterated the position taken by the Committee on Investor Awareness and Protection, of which Swarup is the chairman, in the consultation paper put out by it. The panel hasproposed a drastic reduction in the commissions.
Predictably, this hasn't gone down well with the high-commission-earning insurance agents, who have been holding protests across the country.
The Life Insurance Agents' Federation of India (LIAFI), which represents the over 14.5 lakh agents of Life Insurance Corporation of India, has held a series of protests since September 5 in cities including Jalandhar, Ludhiana, Hyderabad, Secunderabad, Bangalore, Mysore, Nagpur, Delhi and Kolkata. The last of the protest meets was held at Lucknow, where nearly 15,000 agents are said to have participated.
"Cutting agent's remuneration is not the solution," the LIAFI website screams, with a caricature (above) showing Swarup sabotaging what, ironically, may be their gravy train.
S B Sreenivasa Chary, president of LIAFI, said the federation has decided to wait for the final report of the committee and will hold protests in Delhi if the recommendations are not in its favour. "We will decide the intensity depending on the final report," he said.
The final report is expected in 2-3 weeks more.
The bone of contention is the Life Insurance Act 1938, which allows life insurance companies to pay commissions as high as 40% of the premium amount to an agent during the first year, 7.5% of the commission during the second year and 5% thereafter. The commission is to be limited to 2% in case of single premium plans and 7.5% of the first year's premium in case of pension plans.
J Hari Narayan, chairman of Insurance Regulatory and Development Authority, is in favour of continuing with the commissions. "The maximum commission paid might be 40%, but in several products, the commission is 2%," he had pointed out to reporters on the sidelines of the CII insurance summit earlier this month.
On its part, LIAFI had said in a statement sometime back, "It is a matter of pity that the average income of the life insurance agents today is around Rs 57,000-60,000 per annum, which is much below the salary of a Class IV employee."
All the same, there is no denying that the commission paid is very high, with the industry commission expense ratio (commission expenses as a percentage of total premiums) at 16.25%.
In comparison, mutual funds used to pay their agents a commission of 2-3% on investment in equity funds till recently, and even that has gone down recently as mutual funds are no longer allowed to charge entry loads.
Clearly, the Swarup and the committee led by him are out to correct the anomaly.
"The tentative conclusions that the committee has reached are: There is a need for common entry barriers and common minimum standards for examinations, continuing education and of course a common code of ethics for advisors across financial products," said Swarup.
"We have said that in the industry there will be no commissions embedded in the price of a financial product, in short, no loads from a particular date," he added. "The consultation charge paid to a doctor is not embedded in the price of the medicine. You pay a separate consultation charge and a separate price for medicine. Why should a financial product be something different?"
Swarup also pointed to the high lapsation rate on insurance policies, given the lopsided commission structure, where maximum commission is paid out in the first two years. "In 2007-08, the lapsation rate (policies where people stop paying premium midway) in the life insurance industry ranged from 4% to 80%, with an average rate of 20% as per Irda-published figures," he said.
Swarup made light of the opposition. "There was an IIM Professor in the public hearing that we held on September 9 who made a comment. He said, till yesterday, a gas cylinder was universal for each household. Today there are gas pipelines in Bangalore, Delhi and Mumbai. People opposed it. They said, "The gas cylinder was almost a household member, we were connected with that person and we would be happy if you let him be with us." There is an inertia to change. Once the job is done, you are happy with it. There will be inertia to change," the PFRDA chairman said.


